The famous Elliot wave theory was developed by R.N. Elliott. These theory has changed the whole world of trading. Trend trading and identifying the reversal is very easy using the Elliot wave theory. The Elliot wave generally consists of 5 wave in the forex trending market. Out of the five wave there are three impulsive wave or motive wave and two corrective wave.
Let’s see an example of Elliot wave sequence
Figure: Elliot Wave sequence
1, 3, 5 are the impulsive wave or the motive waves formed in an uptrend. The correctives wave are 2 and 4.This simple wave theory helps the trader a lot while trading the trending pair.
The first wave is the initial starting wave of any trending currency pair. The second wave is known as the corrective wave. The market retraces downward in second wave creating a higher low. In an uptrend formation higher low is very important since it tells us about the momentum of the trend. The third wave is the most extended wave in Elliot wave. This the trending wave of Elliot wave which creates the major move of the trend. After the major upward move the market tends to retrace a bit. The fourth wave is the last corrective wave in an uptrend. The fifth wave is the last and final wave of an existing trend according to Elliot wave theory.
Trading the Elliot wave
Trading the Elliot wave is very simple. Trader usually rides the third wave of the Elliot wave. Generally a trend line is drawn from the Elliot wave for taking the trade setup. If there is no valid trend line setup traders can use the support and resistance level to take the trade. Price action confirmation should be present while taking the trade at starting of the wave 3.